Lessons from the Banking Crisis: A Return to Narrow Banking

Abstract

In normal times, when people have confidence in the banks, these crises do not occur. But confidence can quickly disappear, for example, when one or more banks experience a solvency problem due to non-performing loans. Then bank runs are possible. A liquidity crisis erupts that can bring down sound banks also.The latter become innocent bystanders that are hit in the same way as the insolvent banks by the collective movement of distrust.